The recent surge in home prices has undoubtedly increased homeowner equity. However, homeowners are currently tapping into a lower level of equity than the historic norm, and the main culprit behind this trend is the rise in interest rates.
According to real estate analytics company Black Knight, mortgage holders withdrew a total of $39 billion in home equity during the second quarter. This figure includes second-lien home equity loans, lines of credit, and first-lien cash-out refinances. While it represents an increase compared to the $37 billion accessed in the first quarter of this year, it is significantly below the approximately $79 billion tapped in the second quarter of 2022.
The pandemic’s ultralow mortgage rates were a mixed blessing for homeowners. For those who are content with their current homes and have no plans to move or renovate any time soon, the recent rise in mortgage rates may have little impact. However, those who are unhappy with their homes may find themselves with limited options.
With higher interest rates, tapping into home equity to fund repairs and renovations has become more expensive. Black Knight’s September mortgage monitor report emphasizes that “rising interest rates are having a clear and decisive impact on both how and how much equity mortgage holders are willing to withdraw from their homes.”
According to the report, homeowners withdrew an average of 0.92% of tappable equity each quarter between 2010 and 2021. However, in the past three quarters, this share has dropped to 0.4%. This suggests that approximately $200 billion in equity has been left untouched and has not been reinvested into the broader economy since interest rates started climbing around 15 months ago.
Despite the positive impact of rising home prices on homeowner equity, the implications of higher interest rates cannot be ignored. It remains to be seen how this trend will evolve and how it will shape homeowner decisions in the future.
Higher Mortgage Rates Decrease Homeownership Incentive
Recent data suggests that higher mortgage rates have significantly reduced the incentive for homeowners to move. According to Redfin’s data for the four-week period ending on August 27, active home listings remained well below levels seen a year ago. This trend can be attributed to the fact that mortgage rates, as measured by Freddie Mac on a weekly basis, have been above 6% throughout the year. In fact, the average 30-year fixed-rate mortgage reached its highest level in decades at 7.23% last month. Although there was a slight decrease last week, an increase in the 10-year Treasury yield may result in another weekly gain soon.
These factors have had a significant impact on future home sales, with the Mortgage Bankers Association reporting that their seasonally-adjusted index measuring the volume of applications for home purchase loans fell to its lowest level in 28 years last week. Joel Kan, the trade group’s deputy chief economist, attributes this decline to low housing inventory and elevated mortgage rates.
Despite these challenges, there was a modest increase in median home prices in July. According to the National Association of Realtors, the median home sold for $406,700, representing a 2% year-over-year gain and the first such increase since January. Lawrence Yun, the trade group’s chief economist, emphasizes that most homeowners continue to enjoy significant wealth gains and are not overly concerned about potential declines in home prices.
Moreover, strengthening home prices have led to substantial gains in home equity. Black Knight reports that their measure of tappable equity, which refers to the amount of equity that a homeowner could use while leaving 20% untouched, reached $10.5 trillion in June. This level is not far from its 2022 peaks, according to the analytics company.
In conclusion, the combination of higher mortgage rates and limited housing inventory has resulted in a decrease in homeowners’ incentives to move. However, despite these challenges, home prices have shown some growth, leading to increased home equity for many homeowners.
